Project ON

Relation between Indian stock market and varied US markets since liberalization

VS

Presented By Name Manisha Asnani Roll No (05)

Niraj Bajaj

(07)

Tripthi Bajaj

(08)

Ashwani Kumar

(08)

Saumya dev

(09)

Sr. No. 1

Title
Abstract

Page no.
4

Acknowledgement

Literature review

History

Methodology Post Liberlisation

12

Analysis

15

Conclusion

17

Bibilography

19

ABSTRACT

Correlating BSE Sensex with NASDAQ stock exchange. This study tries to analyze the relation between BSE Sensex with NASDAQ. When BSE sensex increases to new highs questions arises that weather there is an increase in other world stock market or not, we tried to find out the correlation between BSE sensex with NASDAQ. For this purpose we have collected daily 1 year closings from 1st JAN 1991 to 31st DEC 2012 of BSE and AMERICAN stock markets. The study suggested that there is an overall positive as well as negative correlation between BSE sensex and NASDAQ. To know the risk and return of the BSE and NASDAQ. To identify the factors influencing the indices.

Acknowledgement
We, would most sincerely like to thank Prof. NUPUR GUPTA for providing us with the opportunity of working upon such an interesting topic Relation between Indian stock market and varied US markets since liberalization which has greatly helped us in enhancing our knowledge and we thank her for the invaluable insight and support without which it would not have been possible to complete this project.

-Thank you.

Literature Review
Equity trading in India was dominated by floorbased trading on Indias oldest exchange, the Bombay Stock Exchange (BSE) upto late 1994. This process had several problems. The floor was non transparent and illiquid. The non transparency of the floor led to rampant abuse such as investors being charged higher prices for purchases as compared with the prices actually traded on the floor. It was not possible for investors to crosscheck these prices. Investors were forced to pay high brokerage fees to undercapitalized individual brokers, who had primitive order processing systems. In 1992 the conclusion was a) Indian stock market is highly speculative, b) Indian investors are dissatisfied with the services provided to them by the brokers, c) margins levied by the stock exchanges are inadequate and d) liquidity in a large number of stocks in Indian markets is very low. This situation was transformed by the arrival of the new National Stock Exchange (NSE) in 1994.The removal of License Raj especially in areas related to private sector financing options, led to a direct increase in market based financing of industrial investments through an expansion in three broad channels, FDI, Global depository receipts (GDRs) in the international market and the last being the Capital market which consists of the secondary market and the new issue market. One important factor that led to the growth of the new issue market was the growing significance of financial assets, with increase in the saving rate and monetisation of the economy.

Controller of Capital Issues Act in 1992, enabled issuers to freely access the market and enabled a flurry of activities in the primary market which attracted a large number of households to invest in equity issues,. These issues saw a rapid decline in valuations on the stock market when trading commenced and there was a substantial loss of wealth of the households who had invested in them. In some cases there were companies who vanished completely after gobbling peoples hard earned money. Such companies were termed as fly by night operators. By 1995- 96 there was worrisome erosion of investor confidence and investors turned away from direct investment in equity shares to safer fixed income instruments and bank deposits. Primary market activity diminished significantly and the market remained dull till about the third quarter of 1999. The high interest rates prevailing since 1995-96 further encouraged this trend. In order to gain investor confidence a lot of initiatives were taken and the SEBI was bestowed with more power.

Bombay Stock Exchange (BSE)

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 20042005, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a

proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition

NASDAQ
The NASDAQ, an acronym for National Association of Securities Dealers Automated Quotations, is an electronic stock exchange with 3,300 company listings. It currently has a greater trading volume than any other U.S. exchange, making approximately 1.8 billion trades per day. The NYSE is still considered the biggest exchange because its market capitalization far exceeds that of the NASDAQ. The NASDAQ trades shares in a variety of companies, but is well known for being a high-tech exchange, trading many new, high growth, and volatile stocks. This is partially due to the fact that the listing fees on the NASDAQ are significantly lower than those for the NYSE, with the maximum price only $150,000. The NASDAQ is a publicly owned company, trading its shares on its own exchange under the ticker symbol NDAQ. The NASDAQ, as an electronic exchange, has no physical trading floor, but makes all its trades through a computer and telecommunications system. The exchange is a dealers' market, meaning brokers buy and

sell stocks through a market maker rather than from each other. A market maker deals in a particular stock and holds a certain number of stocks on his own books so that when a broker wants to purchase shares, he can purchase them directly from the market maker. Since there is no trading floor where the NASDAQ operates, the stock exchange built the NASDAQ Market Site in New York's Times Square to create a physical presence. The tower has a large outdoor electronic display, giving current financial information 24 hours a day. The NASDAQ was developed in 1971 as the first electronic stock exchange in the world. It was created as a means to increase the trading of Over-the-Counter stocks, those that were unable to meet listing requirements for larger exchanges. 2,500 OTC stocks were traded on the NASDAQ's first trading day, February 8, 1971.

Method
BSE Sensex as an indicator for the Indian stock prices and DGIA and NASDAQ as an indicator for the US stock prices. The movements of the daily stock prices, corrected for exchange rate and base effects clearly depict a close degree of cohesion between these markets and the Indian market, during various phases of ups and downs in the sample period. During the last decade and a half, it has been recognized that external sector indicators like exchange rate, foreign exchange reserves and value of trade balance can have an impact on stock prices. Early studies in the area of exchange rates stock prices considered only the correlation between the two variables. This Theory explained that a change in the exchange rates would affect a firms foreign operation and overall profits. This would, in turn, affect its stock prices. The nature of the change in stock prices would depend on the multinational characteristics of the firm. Conversely, a general downward movement of the stock market will motivate investors to seek for better returns elsewhere. This decreases the demand for money, pushing interest rates down, causing further outflow of funds and hence depreciating the currency. While the theoretical explanation was clear, empirical evidence was mixed. It was found that the relationship between stock returns and exchange rates are bidirectional in nature.

Post liberalization
After the liberalization of the Indian capital market its integration with international financial markets has grown. Here, we examine the co-movement of the Indian stock market with developed markets like US using monthly data for the period May, 1991 to October, 2012. We find that our study yields an interesting result that indicates a unique role of India in the degree of linkages of these stock markets during the recent period of more open capital markets, where FII investments play a key role in synthesizing markets across a region. Altogether, the whole gamut of institutional reforms concomitant to globalization programme, introduction of new instruments, change in procedures, widening of network of participants call for a reexamination of the relationship between the stock market and the foreign sector of India. Correspondingly, researches are also being conducted to understand the current working of the economic and the financial system in the new scenario. Interesting results are emerging particularly for the developing countries where the markets are experiencing new relationships which are not perceived earlier. Stock exchanges have a long presence in India. The BSE, the oldest one, was established in 1875. At the time of Independence there were seven stock exchanges functioning in different parts of the country. The 'eighties witnessed impressive expansion in the number of listed companies, amount of capital listed, market capitalization and value of shares sold and purchased on the exchanges. Eleven stock exchanges were given recognition during this period. The number increased further to 22 (excluding the National

Stock Exchange) by 1995. The overall number of exchanges continues to be the same. When markets are said to share a single common stochastic trend, it indicates that these markets are perfectly correlated over long horizons and gains to international diversification will diminish or disappear over the long term. Before the markets did not share a common trend, which means that the investors in the stock markets did not fully exploit diversification opportunities. However, afterwards investor behavior in the stock markets seemed to suggest that trends in the US markets as well as neighboring stock markets did influence their markets There are many factors that affect the performance of the Sensex. These factors could be related to the prevailing market conditions in the country, investment policies of the government. The investment environment also depends upon how the BSE Sensex facilitates the conduct of the trading activity on a daily basis. .

Analysis
The value of r is such that -1 < r < +1. The + and - signs are used for positive linear correlations and negative linear correlations, respectively. Positive correlation: If x and y have a strong positive linear correlation, r is close to+1. An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a relationship between x and y variables such that as values for x increases, values for y also increase. Negative correlation: If x and y have a strong negative linear correlation, r is close to-1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a relationship between x and y such that as values for x increase, values for y decrease. No correlation: If there is no linear correlation or a weak linear correlation, r is close to 0. A value near zero means that there is a random, nonlinear relationship between the two variables. The present study has examined whether a long run relationship exists between two major stock indexes in US namely NASDAQ Composite Index on the one hand and stock indexes in India namely BSE Sensex on the other. The results indicate a cointegrating relationship between NASDAQ Composite Index and BSE.. The results indicate varying degree of causal relationships between the two co integrated time series i.e. NASDAQ Composite Index and the BSE Sensex. But, all of them converge on one point that is, NASDAQ Composite Index causes BSE Sensex. This may be so because of the liberalisation of Indian economy and the growing importance of TMT stocks in driving the Indian stock markets. As indicated earlier, the trade liberalisation process in India integrated many Indian and Multinational companies. As a result the profit performance of many Indian

companies became dependant on the performance of their foreign counterparts. The listing of Indian companies in foreign markets also played an important role in the Integration of the Indian Stock Market. However, there remains a lot of dissimilarity between NASDAQ Composite and the BSE Sensex: a) NASDAQ is an over the counter exchange whose counterpart in India is OTCEI (Over The Counter Exchange of India). b) NASDAQ Composite Index is calculated by using Market Value Weighted Method, whereas National Stock Exchange is calculated by using Market Capitalisation Weighted Method. c) The composition of both the indexes are vastly different, whereas NASDAQ Composite comprises of 5,000 scrips with Computer, Biotech and Telecom accounting for 75 per cent of the weightage, BSE Sensex is much more diverse comprising of 4500 scrips representing 25 industries. The Nasdaq Composite index thus is a very broad based index, which consists of a lot of small companies where as while constructing Sensex the most liquid scrips of companies which are leaders in the industries they represent are considered. Therefore it could be said that fundamentally both the indexes are vastly different and any co movements observed may be due to other reasons (behavioural). Hence, many financial analysts have suggested that Dow Jones Industrial Average may be a better benchmark for the Indian Stock Indexes to follow, but the current study reveals that, in fact, Indian Stock Market indexes do not share a long run relationship with the Dow Jones Industrial Average either. This may be so because DJIA is based on the thirty largest and most liquid stocks traded in the US markets. Also, DJIA is a price-weighted index, hence it assigns a higher weightage over time to those stocks that experience higher prices. As a result of this, the index tends to have an upward bias in its estimation of the markets overall performance.

Here correlation means relationship between two or more variables. In this study we taken two variables BSE SENSEX and NASDAQ. In the period ranging from 1991 to 2012 the correlation between BSE SENSEX and NASDAQ is 0.5976 .so there exists slight positive relationship and all data points are form as non linear structure and tilts upwards towards right. So there exists strong positive relationship as all data points tilt Upwards towards right. There is an overall positive as well as negative correlation of returns between the BSE sensex and NASDAQ stock exchange, if considered monthly. From the returns among 12 month data collected 10 months have positive correlation and 2 months have negative correlation on returns. It shows that when BSE is increasing NASDAQ is decreasing and vice-versa because financial institutions are the main investors in BSE sensex. Also the variations from linear trend line are less in case of NASDAQ as compared to BSE that is when a linear trend line will be plotted few no of points will lie away from that line for

NASDAQ. The value of Beta is 4 which is good meaning good returns can be expected in both markets. If we see the closing of both BSE and NASDAQ its as follows. BSE started with a closing of 1908.85 and NASDAQ started with a closing of 542.98 in the year 1991 and 18713.55 , 3064.81 in the year 2012. By seeing the closing of both the stock markets we can say that increase and movement of funds is more in BSE when compared to NASDAQ.

BIBLIOGRAPY

1. WEBSITES

http://www.bseindia.com http://www.bseindia.com/about/introbse.asp http://www.bseindia.com/about/abindices/preface.asp http://www.ieg.nic.in/dis_rna_20.pdf http://en.wikipedia.org/wiki/NASDAQ http://www.nasdaq.com/ http://images.search.yahoo.com/search/images?_adv_prop=images&img sz=all&va=nasdaq+logo&ei=UTF-8&fr=slv8-msgr&b=1